How States Could Lower Costs for Brand Name Drugs

States are searching for new and innovative approaches to handle the rising cost of prescription medicines – both the sudden spike in spending that comes with a new high-cost treatment and the ongoing challenges of regular, inexplicable, price hikes for all covered drugs. The United States has the highest prescription drug prices in the world. As a country we spent $457 billion on prescription drugs in 2015, or 16.7 percent of overall personal health care services.[i] For employers, retail prescription drug spending represents 21 percent of benefits.[ii] These prices are only projected to rise — the price for branded drugs rose 14.77 percent in 2015.[iii]

NASHP’s Pharmacy Costs Work Group examined how states regulate consumer costs of public goods such as electric and gas to see if there was the potential for drug rate regulation. While not a perfect parallel to prescription drug market, the Work Group found that there are similarities: public utilities require investments in costly infrastructure; pharmaceutical manufacturers likewise invest in costly research and development necessary to create new drugs. Both utilities and prescription medicines are products that serve a public good. Both utilities and pharmaceuticals are often provided by a single or limited number of suppliers. In utility regulation, the state balances consumer interest by allowing the monopoly but regulating the rates consumers can be charged.

The Work Group recognized that the state also has a role in health care rate setting – how much the state will pay for different health care goods and services is a routine state function in Medicaid, state employee benefits, and corrections among others. Maryland has a successful all-payer rate setting system that has been in operation since the late 1970’s. The Maryland system had produced savings of $45 billion through 2013 and hospital costs dropped from almost 24 percent above the national average to less than the national average in recent years.[iv] Rate setting is routine in the commercial health market as well – including payment rates for brand and generic drugs.

Rate setting has been important to ensure that consumers are protected from markets that don’t operate perfectly. Health care and utilities are two such markets.

The newest NASHP model legislation, “Drug Payment Rate Regulation”, provides a framework to set payment rates for those drugs that create affordability challenges to payors and consumers – typically drugs made by one or a few companies. Health care payors don’t pay what the supplier charges, but rather, they pay rates they developed. The framework builds on the precedent of health care rate setting and state regulation of public utilities.

Under the NASHP Model Legislation, a state would establish a Drug Cost Review Commission and an Advisory Board to the Commission. The Commission is a small independent organization of people with expertise who do not represent any stakeholder group. The Advisory Board is a larger organization that represents stakeholder perspectives and relevant professional expertise. The Model Legislation goes beyond price transparency to build on provisions of the NASHP Model Drug Price Transparency Legislation as the first step in the Commission’s work — gathering information about certain drug prices to determine if rate setting is needed. Based on the NASHP transparency model, manufacturers must report on pricing decisions if those pricing choices result in prices that reach certain thresholds. There are different thresholds for brand and generic drug launches, and brand or generic price increases.[1] While pricing decisions may trigger reporting, the manufacturer has complete authority over the price they chose for their drug.

Another part of the Commission’s work would be to decide whether to undertake an affordability review of a drug when a manufacturer pricing decision triggers reporting under the transparency provisions, above. The Advisory Board and the public would provide input on whether an affordability review is needed. If an affordability review is undertaken, the Commission would gather additional information from the manufacturer as well as input from the Advisory Board, payers, providers and consumers. In the affordability review, the Commission would determine if a particular drug product generated excessive costs for payers and consumers and if so, the Commission would have the authority to establish an upper payment limit for the product, and all payors in the state would be required to pay no more than this upper limit rate. The Commission is not regulating drug prices.

The Commission’s payment rate — or upper limit—would help to mitigate the affordability challenges otherwise posed by the drug and assures that patient access to the medicine is improved.

In making such a determination, the Model Legislation builds on both the Canadian drug regulatory system and the U.S. health care rate setting system that looks at prices and system costs. The Canadian drug cost regulatory system was established 1993 in a bargain with the brand drug industry to improve patent protections in exchange for price regulation – which is highly analogous to the state role in public utilities. The Canadian approach is in contrast to the U.S. where we have strong drug patent rights and no price regulation. The Canadian Board looks to see if prices are “excessive”, the NASHP Model Legislation would look at whether a drug creates “excessive costs” to a state’s health care system because our history is in rate setting, not price setting. According to the records published by the Canadian Patented Medicine Prices Review Board, of the 86 new drugs eligible for review in 2015 by the Canadian Price Review Board, only five drugs required Voluntary Compliance Undertakings (VCUs) from manufacturers. Of the 103 new drugs eligible for review in 2014, only five drugs required VCUs.[v]

The U.S. history with health care rate setting is extensive and includes drugs directly and indirectly. Payers set pharmacy reimbursement rates that may or may not take into account what the pharmacist paid to acquire a drug. Payers set bundled rates for inpatient stays where drugs are part of the bundled payment but drug price is not directly accounted for.

The Model Legislation does not use “value” as part of its analysis of what a drug should cost because there is not yet a U.S. consensus on how to translate value into monetary units and there is no consensus about how to define or assess a drug’s value – although this is an emerging and promising field. Instead, the Commission would set a limit on payments, but the decision about value and whether to include a certain drug on a formulary would remain with each payor.

All payors in the state health care system would have to abide by the state reimbursement limits. The Model Legislation does not stop payers from negotiating better deals through the traditional rebate and other manufacturer price concession models, but the structure of the upper payment limit will assure that the cost of the drug is limited throughout the health care system – down to the consumer or patient level – which would be an improvement on the current back-channel discounting to large payer organizations. In today’s system, the back channel rebates are not transparent, and more importantly, do not necessarily benefit the consumer at the point of service. An all-payer drug payment would drive what health plans pay pharmacies, what consumers pay when paying out of pocket, and what pharmacies will pay for stock and be reimbursed by payors. This transparent rate setting would be an improvement over the non-transparent and complicated system of rebates and other price concessions that only benefit some parts of the health care system.

This newest Model Legislation is the third in a series of Model Legislation that represent the ideas and concepts put forward by the NASHP Pharmacy Costs Work Group in their October 2016 report, “States and the Rising Cost of Pharmaceuticals: A Call to Action”. The report presents 11 different ideas for states seeking ways to address costs of important drug treatments. The Work Group, comprised of 18 geographically, politically, and professionally diverse state officials, believes that among the range of ideas in the report, there is at least one suitable for every state to initiate.

[1] For brand drugs, manufacturers must notify the Commission about new drugs coming to market that cost $30,000 or more per course of treatment or annually, or that have a price increase of more than 10 percent or more than $10,000 in a 12-month period. For generics, the threshold is a product coming to market with a price of $3,000 or more, or a product with a price increase of more than 25% or an increase of more than $300 in a 12-month period.

[i] ASPE “Observations on Trends in prescription Drug Spending.” March 8, 2016. Accessed online. June 28, 2017

[ii] Cox, C. Anthony Damico, Gary Claxton, Larry Levitt. “Examining high prescription drug spending for people with employer sponsored health insurance.” Peterson-Kaiser Health System Tracker. October 27,2016. Accessed online. June 28, 2017

[iii] Dennis, B. “Prescription Drug Prices jumped more than 10% in 2015, analysis finds.” January 11, 2016. Accessed online. June 28 2017

[iv] Coyle, Carmela. “Maryland’s Triple Aim Roadmap.” Health Affairs Blog. January 28, 2014. Accessed online. June 20, 2017

[v] A VCU “is a written commitment by a patentee to comply with the Board’s Guidelines, including adjusting the price of the patented drug in question to a non-excessive level and offsetting any excess revenues that may have been received as the result of having sold the patented drug at an excessive price in Canada. Patentees are given the opportunity to submit a VCU when Board Staff concludes, following an investigation, that the price of a patented drug product sold in Canada appears to have exceeded the Guidelines.” (